A bad credit score doesn’t mean you’re a bad person. Healthcare bills, sudden family emergencies, rent increases or just an extended bad run of luck can create financial problems. And once you’re in a hole, it can take a while to dig yourself out.
But banks tend to assume that if you had a money problem once, you’ll always be a bad financial risk. You can understand why they don’t want to lend money to someone who may not repay it – you wouldn’t want to take that chance either. But how do you rebuild your business without capital to fund that growth? At best, you’ll need a lot of collateral to secure a loan – and even then, if your credit score is below 700, you’re going to have a really hard time getting a loan from a traditional bank or credit union.
Credit Scores and Small Business Loans
Business loan risk is primarily calculated by a credit score – other factors come into play, but a credit score is often the first thing that banks check. Typically, they look at a FICO score – and personal FICO scores range from 300 to 850. With FICO, 800 and up is an excellent score, mid-to-upper 700s is very good, low 600s is problematic and anything below 500 indicates a serious credit risk.
You may also have a business credit score if you have a merchant bank account and a business credit card. Business credit scores run from 0-100, with 75 considered excellent. It’s worth checking, but chances are as a small business owner, your personal score will be reviewed when you want to secure a loan. So, start off by getting your credit reports, and finding out how your score (or scores) rank.
What You Need to Know About Collateral
Besides a credit score of 700+, a bank is going to want collateral. The U.S. Small Business Administration (SBA) defines collateral as "an additional form of security which can be used to assure a lender that you have a second source of loan repayment."
Collateral is something that the bank can sell to recoup its loss if you can’t pay back your loan. Real estate, property, your business’ inventory or equipment, things of value that you own – such as a boat or vehicles or the money in a secured savings account qualify as collateral. Banks tend to prefer assets that can be easy converted to cash – so your bank account is going to be much more attractive than something they have to sell at auction.
Banks are also interested in collateral that will retain its value, and typically the value of collateral depreciates, or the lender may have to accept a lower price to liquidate it quickly. In general, as collateral, your assets are worth:
- 60% to 70% of the value of commercial real estate
- 50% of the value of resalable inventory (if there’s no widespread market appeal for your inventory, the value as collateral will be much less)
- 40% of the value of equipment
- 30% of the value (or less) for technology.
So if you’re securing a loan with your inventory a $50,000 loan would require at least $100,000 in inventory as collateral. Banks value inventory differently though, and the collateral’s worth depends on the type of inventory/property you have, and the current market for your collateral. And if your business is new, or is struggling financially, you’ll have to provide more collateral than someone who has a profitable business that’s been open for a few years, and a solid credit history.
Note that if you’re financing specific assets such as equipment or technology, a loan can sometimes be secured by the assets you’re financing. If you can’t pay the loan, the assets are forfeit.
No Collateral, No Credit Funding for Small Businesses
Do you need funding right now? If not, you could take a year or two and work to improve your credit score before you apply for a loan. Or you might be able to borrow cash to obtain a secured loan from your credit union, which will raise your score if you pay back the loan on time. You can also look into getting a secured business credit card.
But if you do need funding soon, then you’ll want to look for sources that focus on your ability to pay now rather than your credit score. In general, applying for loans if you don’t meet a lenders credit score requirements is a waste of time at best, and may actually end up lowering your credit score at worst. Instead look for funding sources that specify they will work with small business owners with bad credit.
You can Google for “Bad Credit Business Funding” and slowly shift through the many options. Or you can save yourself the time and hassle and contact One Park Financial. Their experts will help guide you through the funding process to match you with a member of their vetted funding network that serves small businesses. Pre-qualification is easy, even if you don’t have a perfect credit history. One Park Financial will serve as your advocate, and will help you find the right funding offer for your business needs.
Visit oneparkfinancial.com or call 855.218.8819 for more information.